Thursday, September 25, 2008

SSA actuaries score new reform proposal

On September 17 the Social Security Office of the Chief Actuary released an actuarial memorandum describing a proposed reform from Mark Warshawsky, director of retirement research at Watson Wyatt Worldwide and a member of the Social Security Advisory Board. The proposal has a number of provisions, including:

  • Reducing the payroll tax ate while increasing the maximum taxable amount;
  • Exempting individuals with more than 45 years of work from payroll taxes
  • Taxing retirement benefits like private pensions
  • Phasing out the drop-out years in the Primary Insurance Amount (PIA) computations
  • Including newly-hired state and local government employees in Social Security
  • Increasing the normal and early retirement ages
  • Converting disabled workers to retiree status at the early retirement age rather than the normal retirement age
  • Reducing PIA replacement factors
  • Adding voluntary personal accounts from additional contributions, with a federal match

The actuaries conclude that:

Under the plan specifications described below the Social Security program would be expected to be solvent and to meet its benefit obligations throughout the long range period 2008 through 2082. The long-range OASDI actuarial deficit of 1.70 percent of payroll and the OASDI long-range unfunded obligation of $4.3 trillion in present value would be eliminated. In addition, trust fund assets expressed as a percentage of annual program cost are projected to be rising at the end of the 75-year period. Thus, the proposal meets the long-range criteria for sustainable solvency and the program would be expected to remain solvent for the foreseeable future.

Click here to read the whole memo.


Bruce Webb said...

Thanks Andrew.

I put up a post at AB (crossposted at my site) linking back to this post as well as to the actual memo from the actuaries.

My analysis so far is pretty preliminary and so superficial but it seems that Warshawsky's plan shares the same deficiencies as LMS, the pain for the worker is guaranteed upfront while the gain remains contingent. In fact the memo suggests that most people retiring before 2029 and many people before 2039 are at some risk (note to table on page 13):

"The personal account annuity replaces the smallest portion of the reduction in the scheduled benefit for the married couple with only one earner. The annuity would fall somewhat short of covering the PIA reduction for one-earner couples retiring at 65 in about 2030 or earlier. For single workers and two-earner couples retiring after 2039 with low career earnings, however, this approach would
generally be expected to provide an overall increase in retirement income."

Which is nice for Millenials but not so good for Boomers and early Gen-Xers.

Plus, though it is hard to tell, the comparison doesn't seem to be apples to apples. Warshawsky seems to be asking everyone to work longer, for disabled people to take lesser benefits by transferring them from DI to SSA at Early Retirement and then not particularly guaranteeing a better net result from the PRAs. Which is something it seems to share with the Ryan plan: first build in structural changes in lifetime benefits, THEN compare results between the adjusted schedule and the PRA based version.

Andrew G. Biggs said...

I'd have to check the Warshawsky numbers more carefully, but I think you know from past conversations that I don't find the arguments against the LMS plan too moving so probably wouldn't here either.

In the second part, you're right that there are two different sets of comparisons in plans like these. The first compares benefits under the plan to scheduled benefits, and the second compares benefits for account holders to those for non-account holders. This is an add-on plan so the dynamic is a bit different than for carve-outs, but I think both sets of comparisons can be useful if viewed in context.